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Get Legal Clarity on what type of company you should form

I am often asked what type of company an entrepreneur should form. As with so many of these topics, the answer is, it all depends. So it is great to see the good folk at Legal Clarity (who aim to ease the burden of legal and regulatory obligations) has produced a nice clear guide to the options which I have copied below.

Standard Limited Company

The overwhelming majority of companies registered at Companies House are standard limited companies (more formally known as private companies limited by shares).

If you are forming a company with a view to making a profit then a standard limited company is probably appropriate for your needs. We would recommend that you do not form a Company Limited by Guarantee or a Public Limited Company unless you have a specific reason for doing so.

Features of a standard limited company:

Benefits from Limited Liability.

Suitable for most commercial purposes.

It only requires one person to form this type of company.

Does not require a Company Secretary.

Is not obliged to have its accounts audited by an accountant if it is a small company.

Can be converted into a Public Limited Company at a later date.

Company Limited by Guarantee

This type of company is suitable for non-profit making organisations such as voluntary groups, sports clubs, political organisations, and for one off or recurring events such as non-profit festivals and fairs. Companies limited by guarantee formed through Legal Clarity are not Charities, and are therefore not subject to the additional regulatory requirements imposed on Charities.

The members of companies limited by guarantee (the equivalent of shareholders of a normal company) are not permitted to extract money from the company, even if the company has surplus funds.

This company can only carry out activities to meet objects specified on forming the company (for example ‘to provide a sports club for the local community’).

This type of company does not issue shares or have shareholders.

It only requires one person to form this type of company.

Does not require a Company Secretary.

Is not obliged to have its accounts audited by an accountant if it is a small company.

You CANNOT convert this type of company into a Public Limited Company.

Public Limited Company (PLC)

It is rare for a company to start its life as a Public Limited Company. PLCs are normally formed by converting an established standard limited company into a PLC.

A key feature of PLCs is their ability to offer their shares to the public (if certain conditions are met). Standard Limited Companies cannot do this.

PLCs are subject to more onerous regulation than standard limited companies. They are typically larger and longer established than standard limited companies.

Businesses sometimes become PLCs for the prestige of identifying themselves with larger and longer established companies; these companies are referred to as ‘vanity PLCs’.

Features of PLCs:

Benefits from Limited Liability

Requires at least two directors.

Requires a company secretary, with specific qualifications.

Requires a minimum initial investment of £12,500 with an obligation to pay a further £47,500 at a later date.

Requires a Trading Certificate confirming the above initial investment before the company is permitted to trade.

Shares may be offered to the general public for sale (if certain conditions are met).

PLCs are subject to more onerous accounting obligations. Including a mandatory annual audit.

Other types of business structure:

Sole Trader

A sole trader is not a type of company, but rather an individual who trades on their own behalf.

Sole traders are not required to register with Companies House. In order for an individual to set-up as a sole trader they simply need to start trading or carrying on business activities.

Sole traders are obliged to register as self-employed with HM Revenue & Customs within three months of starting to trade.

The most important point to note is that, unlike the shareholders of limited companies, sole traders do not benefit from the protection of limited liability in relation to their business. Sole traders are personally liable for all of the debts of their business without limit, which means that their personal assets are at risk.

For further information about the positives and negatives of operating as a sole trader as opposed to a limited company visit our sole trader page.

The description of the above types of company only applies to companies formed by Legal Clarity. Companies formed by other organisations are likely to have different features.